Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Those horrid penalties on BNP Paribas. Are they just a cost of doing business?

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Let’s look at the fines and penalties from a different perspective.

Perhaps the consequences are just a cost of doing business. Perhaps the bank got off easy.

Let’s look at the penalties:

  • $8,973B fine
  • Guilty pleas on one federal criminal count and two state criminal counts
  • 13 individual staff terminated
  • 12 month ban on dollar settlements for six departments

Looking closer…

Fine – public comments are it will not have any impact on the bank. The tier 1 capital ratio will drop around 1/2%, but speculation was a full 1% drop. Tier 1 capital ratio is still around 10%, which leaves them in about the same place as most European banks. There won’t be any need to raise additional capital. Dividends won’t be cut.

In the next post I will quantify the fine in relation to the consolidated financial statements.

Guilty pleas – all federal and state agencies agreed this would have no impact on the bank. All of the enforcement agencies agreed to do nothing because of three criminal guilty pleas.

No loss of pension plan management – The federal plea deal actually says the bank can apply for a waiver from the Department of Labor to be a pension plan manager. Usually a convicted felon cannot manage pensions. The feds will support that application.

Staff terminations – the senior people will retire quite comfortably, I am sure. Junior people can get a job at another bank. Public comments clearly communicate the attitude this entire thing is just a matter of arrogant Americans pushing extraterritoriality of their silly rules. Furthermore, public comments are that French efforts to mitigate the penalties were successful and this is no big deal. I’m sure private comments are even stronger. My guess is there won’t be any taint on the staff who engineered the evasions and got fired.

Ban on dollar settlements – the ban only apply to six specific business units of the bank. The WSJ reports those units only provide 1% of the top line revenue. The ban will not going into effect until January 1, 2015.

That means most of the bank, like around 99% of it by revenue, can continue to use US dollar settlements without restriction.

A six month lead time allows those six units to put in place alternative settlement procedures for all their clients. This may have a minor impact on the cost structure of those six units, but I seriously doubt there’ll be much of an operational impact.

Furthermore, the six month lead time allows contracts to be rewritten into other currencies. That means the transactions can continue as is, just as long as they are not settled through New York. Overall, an extremely minor consequence. I’m guessing tons of other regulations have a more disruptive impact. Sustainability requirements probably create more disruption than the dollar settlement ban.

Minimal impact – Before the plea agreement was signed, French officials warned of the systemic risk to the entire European banking system. If these horrid sanctions were put in place, there would be a risk the entire banking system across the entire Continent might collapse.

Now we hear the bank won’t need to reduce its dividend. It won’t need to raise additional capital. And French officials are taking credit for the mildness of the penalties. Things would have been so much worse if they hadn’t gotten involved, you see.

As a reality check on that last assertion, I’ve been tracking the speculation on the settlement. Terms wound up being very close to the speculation over the last month. The fine is a midpoint between the positions of $8B and $10B. Slightly fewer staff are terminated than the maximum rumored claim. There were three guilty pleas instead of one. The dollar settlements ban is in place, but only applies to certain specific units of the bank. In terms of a big picture, the settlement turned out amazingly close to what the feds have been asking for all along.

Maybe I’m missing it, but I don’t see where the lobbying by the French president and senior cabinet officials did any good.  The place where the lobbying may have had a benefit is getting the dollar settlement ban changed and implementation delayed to the point where it is essentially meaningless. It only affects units with 1% of the revenue volume and the delay allows time to put in place alternate procedures so that the ban won’t disrupt operations. Maybe the lobbying did pay off. On the other hand, you have to dive as deep into the issue as I have to see the results.

Egregiousness

Let me add a few more comments I haven’t mentioned in my previous articles. Just as a reminder, the bank agreed in writing they laundered $190B of transactions that were prohibited under US law. This is an increase by factor of six from all previously visible discussions.

The compliance staff appear to have been fully aware of the scheme. Some of them were co-opted. Some of them, at high levels, were supportive of evading sanctions.

There were extensive, creative, intentional efforts to evade US sanctions knowing the transactions were banned if they settled in US dollars. The bank tried to persuade Cuban clients to convert transactions to another currency, but the clients declined. So they continued settling in dollars.

The bank went opinion shopping in the United States. From what I have read, it obtained at least two written opinions from US legal firms. Those written opinions concluded the bank was violating US sanctions. The opinions will never see the light of day, but it would be fun to read them.

The level of wilfulness, volume of transactions, participation by compliance staff, full notice from US law firms of illegality, and knowledge by senior-level executives is worse than everything it was known before the plea deal was signed.

A WSJ editorial summarizes the role of BNP Paribas in Sudan:

BNP propped up the Sudanese economy, with the bank by 2006 financing a quarter of its exports and a fifth of all imports.

Financial Times points out that BNP held deposits from the Sudan government that were half the country’s foreign currency assets.

One comment by a prosecutor claimed the bank was acting as the Sudan central bank. Maybe an exaggeration, but kinda’ hard to argue with that assertion.

Getting off easy

In light of the outlandish behavior, it looks like the bank got off easy.

Looks like the criminal pleas are a minor issue at this point because all regulators agreed they won’t do anything based on the convictions.

Looks like the dollar settlement ban will have extremely small impact, if any.

Firing a few people is a bummer for them, but I’m sure the bank has a full roster of people who can step up and take their place.

The fine looks like a bargain. Why do I say that?

The WSJ calculated the fines for sanctions busting in relation to the amounts evaded. Their chart is here.

I’ve accumulated the data, with the expected and actual amounts for BNP Paribas added in.

The first column is the dollars of penalty per dollar of illegal transfers:

 

$/$ penalty volume penalty bank
 $   3.125               32          100 RBS
 $   1.000             667          667 Standard Chartered
 $   0.447           1,200          536 Credit Suisse
 $   0.156           3,200          500 ABN Amro
 $   0.300         30,000       9,000 BNP Paribas – expected
 $   0.047       190,000       8,974 BNP Paribas – actual

 

Standard Chartered paid $1.00 for each dollar of sanctions violations. Credit Suisse paid $0.45. Speculation before the settlement was BNP would be paying around $0.30. With their admitting in writing that they ran $190B through New York for dollar settlements, that changes the calculation. An $8.97B fine is under a nickel for each illegal dollar.

Overall, looks like PNB Paribas got off easy for getting caught laundering $190 billion for rogue countries.

Here are a few articles for you to read:

As the next post will point out, overall this looks like a tolerable fine, down in the range of the cost of doing business.

 

Written by Jim Ulvog

July 3, 2014, 9:43 am at 9:43 am

Posted in Other stuff

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  1. […] Those horrid penalties on BNP Paribas. Are they just a cost of doing business? […]


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